Venture Capital
Definition:
Venture capital is a huge amount of money provided by the investors to a company in exchange of equities or shares.
The investors are outsiders and not related to the company and are known as venture capitalists. There is a high risk of loss in such a capital but it brings a huge sum of profit too. The probability of profit as well as the loss affects the venture capitalists in all the ways. It is desirable to provide funds for rapidly growing company to increase its potential in an enormous way.
Venture Capitalists:
The main objective of the venture capitalists is,
- Providing funds to the newly emerging company
- Purchasing shares from the company
- Active participation by assisting in the newly developing services and products of the company.
- Having long term relationship
And believes in the luck, taking high risk by investing huge sum.
During primitive stage, the venture capitalists keenly notices the merits and demerits of the company, based on this, they invest a small amount signing a long term relationship. This is called ‘early stage investing’. Later, they show their active participation by increasing the amount of investment based upon the profit. This is known as ‘expansion stage financing’. Usually, they tie up in parallel with multiple venture capital firms, thus acquiring multiple funds in the same time. The capitalist maintains the contract throughout the company in his later stage investing and provides a big support in the growth of the company.
Structure of the Investment:
There is a fixed duration for the investment and it last from seven to ten years. The venture capitalist has the fixed duration signed up with the company called ‘call down’. The early stage investment takes five years to get complete whereas the later stage investment requires a period less than the previous one. Therefore the investment cannot be short term in case of venture capital.
General Types of Investors
Venture investors are usually generalists who invest in public sector companies and industries which may be spread out in various geographic locations. It does not matter whether the invested companies are in their starting stages or in the developed stages.
Another type of venture investors is the specialists who invest in certain special industries and are concentrated in a particular geographic location. They may have some policies of investing in developed companies or in the opposite way depending upon the motive of the company.
Types of Investments
In general, a majority of the investors avoid investing in new companies or the so called start-ups. It is generally a risk to invest in such companies since there is no surety of profits. Such investments are called as seed investing.
Certain investors have the policy of investing in new but growing companies and they finance the companies for its development. They are called as early stage investing. In such finances, the security is relatively high since the pact is decided only after thorough examinations of the company’s future goals.
The other type of investments where the capitalist provides fund to a developed company just for the maintenance and stock holds is known as expansion stage investments. As the name suggests, these are also done for the expansion of companies.
Investments made in the further stages are known as later stage investments and these are done as a part and parcel of maintaining a cordial and mutual relationship between the investor and the invested companies.
The tenure of investment may be for months to years. It depends on the companies policies. The real goal is to get back good returns in the form of interests which is guaranteed in venture investments.
Venture Capital -
February 12th, 2008
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